Rolls Royce (LSE: RR) is one of those companies suffering the most through the pandemic. In 2019 before the Covid crisis, more than 50% of the firm’s underlying revenue came from the civil aerospace market. So the grounding of most of the world’s aircraft for long periods severely damaged the trading figures.
Should I buy some Rolls-Royce shares now?
But although the civil aerospace division produced the most revenue, it only delivered around 5% of the company’s underlying operating profit that year. And, overall, Rolls-Royce wasn’t in particularly good shape leading up to the pandemic. In 2019, the company produced an overall loss of just over 69p per share. And it was already battling to restructure the business.
Last autumn’s £5bn refinancing package removed some of the immediate worries caused by the Covid crisis. And the directors have stepped up restructuring efforts aimed at right-sizing operations for the future.
The sector may look different for some considerable time as the world emerges from the worst effects of the pandemic. I think the most likely outcome for Rolls-Royce is a shrinking turnover that could remain diminished for years.
But the immediate fire-fighting appears to have subsided. And the company is beginning to look to the future again. In a trading update at the end of January, the directors said its restructuring strategy is driving down costs. But they think there’ll be a free cash outflow from the business in 2021 of around £2bn. And that will be hard on the heels of a free cash outflow of around £4.2bn in 2020. Right now, Rolls-Royce is losing money — a lot of it.
The stakes are high. The company has already moved from having a net cash position worth millions in 2019 to a net debt position worth somewhere between £1.5bn and £2bn now. However, the directors reckon the company has around £9bn of liquidity available to see the business through the rest of the pandemic. Part of that is a target to raise around £2bn from disposal proceeds.
Recovery ahead, but will the business thrive?
The top managers are “confident” the company is “well-positioned” for the future. And they think there will likely be a free cash inflow of around £750m “as early as” 2022. To put that in perspective, the company delivered free cash flow of £873m in 2019, up from £568m in £2018.
But that positive cash flow outcome depends on a recovery in engine flying hours, which itself depends on vaccines beating back the pandemic. Positive cash flow also relies on the ongoing execution of the restructuring and cost-saving programme. I’m also mindful that the £873m free cash inflow in 2019 didn’t prevent Rolls Royce from posting a bottom-line loss.
It looks like the business is set to recover somewhat. But the extent of the eventual recovery is unknown. I reckon the runway ahead could be long and arduous for the business. And that makes it difficult to put a value on the company now.
I’m cautious about Rolls-Royce shares and will watch events from the sidelines for now. We can find out more with the full-year results report due on 11 March.